What is Long Put?
Long Put refers to the trader's purchase of a put option with the intention of selling it at a better price at a later date. The word "long" in this context has nothing to do with the time left before it expires.
When investors believe or predict that the market rate of an equity market will fall, they purchase a long put to increase their publicity to the drop. These put contracts are used by investors that already own the underlying asset and want to secure it.
Understanding of Long Put
A speculative trader might consider purchasing a put, placing a bet that perhaps the underlying security will drop in value, increasing the price of these put options. A long put is used to protect a long time value of the underlying asset.
If the underlying security decreases in value, the put option gains in value, trying to balance the underlying's loss. One of these puts eliminates the chance of losing the opportunity premium paid and increases profit continuously until the current value falls to zero.
Practical Example
Let's say Jhk Limited is currently trading at $150 per share, and you believe its value will drop by around 10% due to a new product release. So you plan to spend $0.40 on 5 put options with a $152 strike price. The entire cost of your long put factors position is $400, including charges (1,000 shares x $0.40 = $400).
If Jhk's stock price drops to $151 before expiration, your put options are now valued at $1.00 since you may use them and be short of 1,000 shares of the stock at $152 before repurchasing it to settle at $151.
(1,000 shares x $1.00 = $1,000) Your total long put options position is now valued at $1,000 (minus the fees and commissions). The position yielded a 150 percent profit = ($1,000-400)/400. You could make a significantly larger profit by using these put options. If Jhk's shares started rising to $200, the 10 contracting parties would become worthless, and you would lose your $400 investment.
In Sentences
- The term long put is widely used in business markets where individuals or investors secure their underlying assets.